At the same time as most of the proposed “solutions” to our current economic melt down include increasing the power of the Federal Reserve, an article appears today that states that the Fed may be considering a “Nordic style nationalization” of US institutions. In particular, the Fed is attempting to come up with a solution which allows the central bank to save a bank or institution, but without the huge undeserved payoff to shareholders of that broke institution (see, Bear Stearns bail out where the shareholders threatened to scuttle the bail out in order to obtain a higher price for their equity shares ... in the insolvent company).

Quote: The US Federal Reserve is examining the Nordic bank nationalisations of the 1990s as a possible interim solution to the US financial crisis....

It is understood that Fed vice-chairman Don Kohn remains very concerned by the depth of the US crisis and is eyeing the Nordic approach for contingency options.

Scandinavia's bank rescue proved successful and is now a model for central bankers, unlike Japan's drawn-out response, where ailing banks were propped up in a half-public limbo for years....

While the responses varied in each Nordic country, there a was major effort to avoid the sort of "moral hazard" that has bedevilled efforts by the Fed and the Bank of England in trying to stabilise their banking systems.

Norway ensured that shareholders of insolvent lenders received nothing and the senior management was entirely purged. Two of the country's top four banks - Christiania Bank and Fokus - were seized by force majeure.

"We were determined not to get caught in the game we've seen with Bear Stearns where shareholders make money out of the rescue," said one Norwegian adviser.

"The law was amended so that we could take 100pc control of any bank where its equity had fallen below zero. Shareholders were left with nothing. It was very controversial," he said.

Stefan Ingves, governor of Sweden's Riksbank, said his country passed an act so it could seize banks where the capital adequacy ratio had fallen below 2pc. Efforts were also made to protect against "blackmail" by shareholders....

The tough policies contrast with the Fed's bail-out of Bear Stearns, where shareholders forced JP Morgan to increase its Fed-led rescue offer from $2 to $10 a share. Christopher Wood, chief strategist at brokers CLSA, says the Fed's piecemeal approach has led to "appalling moral hazard".

"Shareholders have been able to lobby for a higher share price only because the Fed took over the credit risk on $30bn of the investment bank's dubious paper. The whole affair also amounts to a colossal subsidy for JP Morgan," he said.

Here is a link to this interesting article: http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/31/cnfed131.xml

Michael

Here is a great story which provides an inside look at the Bear Stearns bail out by focusing on the Chairman of JPMorgan Chase, Jamie Dimon.

Quote:

The Monday after a long working weekend, Jamie Dimon looked a little tired. His collar was unbuttoned, his tie loosened, and he was slouching slightly in his office chair. The week before, he had turned 52 years old—a bunch of balloons was still tethered in the corner of his office—and his hair was whiter than most recent photos show. But he was far from worn out. Dimon, the chairman and CEO of JPMorgan Chase, had just won the biggest game of his life.

Sunday, March 16, 2008, will go down in history one way or another. Depending on how things develop from here, it might be considered the day Dimon helped save Wall Street. While he certainly wouldn’t put it that way, his shocking triumph that evening—an agreement, brokered by Ben Bernanke, the Federal Reserve chairman, to take over Bear Stearns, a Wall Street institution, for the pretty-much-laughable price of $2 a share—may have in the process helped avert a financial panic the likes of which hasn’t been seen since 1929. Or maybe Dimon will have to settle for the trophy for best deal ever, spending just $260.5 million for a company whose last reported net worth was $11.7 billion and whose lavish Madison Avenue headquarters alone is estimated to be worth more than $1 billion.

...
Then, last summer, the credit markets seized up, and the banks had no way to fund their obligations without dipping into their own capital. Citi had to take $58 billion of SIVs onto its balance sheet, crippling the company.

JPMorgan lost nothing in the SIV debacle. After conferring with Bill Winters and Steve Black, JPMorgan Chase’s co-heads of investment banking, in 2005, Dimon agreed to sell the single SIV the bank had on its books. Why? “Because no matter what kind of equity we might have had to commit toward it, we still considered it an unacceptable return,” Winters told me in late February.

Here another of Dimon’s most referenced character traits—his tendency toward micromanagement—came into play. Did deposed Citigroup chairman Chuck Prince (who got the job that would have been Dimon’s) have conversations with his bankers about whether Citigroup was overexposed to SIVs? If he did, he obviously made the wrong call.

Dimon also steered the bank mostly clear of CDOs, or collateralized debt obligations, another fancy bit of financial gimcrackery that purported to turn risky investments into safe ones, as if by magic. CDOs were one of Merrill Lynch’s great profit centers—in 2007, the firm underwrote $31 billion worth of them, compared with just $4 billion for JPMorgan, and then made the fateful decision to hold on to some of the highest-yielding (and riskiest) portions thereof. You can think of these Wall Street firms as drug dealers who forgot the cardinal rule of the trade: Don’t start taking the junk yourself.

...
More to the point: In contrast to the chatter about Citigroup, no one is talking about breaking up JPMorgan Chase. While the cross-selling synergies have proved more elusive than originally anticipated, one clear benefit of a financial conglomerate is the sheer size of its balance sheet—JP Morgan has $1.56 trillion in assets, the kind of heft that allows it to absorb, say, an imploding investment bank with only a couple of days’ notice.

Here is a link to the entire article: http://nymag.com/news/features/45320/

Michael

On August 29, 2007 Public Defender Service attorney Liyah Brown had a criminal hearing before D.C. Superior Court Judge John Bayly, Jr. During the hearing the two entered into an argument about whether or not the Defendant was in deed "a homeless man". Bayly told Brown to "be quiet" and he would "call the case later" and if she continued she was "going to be in contempt in a minute." When Brown didn't comply with the Court's order, however, Bayly asked a U.S. marshal to "[s]tep her back, please. Step her back." Brown ended up handcuffed, searched, and held for 45 minutes with misdemeanor defendants.

On March 11, 2008 Bayly signed the D.C. Commission on Judicial Disabilities and Tenure's determination stating Bayly had violated the code of conduct and his actions were "grossly disproportionate". Because of Bayly's 18-year tenure on the bench the commission felt no further sanctions were necessary.

You can read the entire article at: http://www.law.com/jsp/article.jsp?id=1206040363513

Chandra

Here is a great little article on the subject of how the quasi governmental entities set up by President Roosevelt in the 1930's are still being used today to save companies like Countrywide Financial. Now of course, the question remains: why do we want to save such a company when it is simply reaping the losses it sowed in bad loans? In any event, here are some quotes from this brief and yet interesting article:

“Despite sustained efforts to tear down the New Deal—from the repeal of the Glass-Steagall Act in 1999 to President George W. Bush's ill-fated 2005 efforts to dismantle Social Security—the 1930s-vintage infrastructure has proved remarkably durable. And this crisis has elicited new experiments in policy, just as the Great Depression did. The Federal Reserve has been systematically lowering its standards for what it will accept as collateral for loans. This week, Hillary Clinton called for a national panel to recommend solutions to the housing morass. (She said the group should include former Federal Reserve Chairman Alan Greenspan, which is a little like Chicago appointing a cow to a panel on preventing disastrous fires.) But as the nation once again confronts a systemic failure in housing and housing-related credit, the Bush administration is going back to the future, using New Deal-era agencies as the cornerstone of its response.”

Here is a link to this article from Slate.com: http://www.slate.com/id/2187039/

Michael

James Krider was a responsible individual who paid his bills, but when life happened he was forced into filing bankruptcy. Willing to live with the bankruptcy notation on his credit report for 10 years, he was not aware that one credit card company was still reporting his discharged credit accounts as delinquent.

Mr. Krider had three credit card accounts with Capital One Bank. When he notified Capital One of what he thought was an oversight, he was informed by not only Capital One but from the three reporting agencies that "it has a perfect right to credit report these accounts as delinquent even though each has been discharged in bankruptcy".

Capital One is not the only company "pushing the envelope" on reporting discharged debts to credit agencies. The hope is that consumers who have been through bankruptcy will pay these debts either because they are not aware of the effect of the bankruptcy discharge or they are simply under a lot of pressure to rebuild their credit.

The lawsuit, Krider vs. Capital One Bank, et al was filed late 2007 in California, with a jury trial set in February 2009.

You can read the entire article at: http://news.yahoo.com/s/prweb/20080326/bs_prweb/prweb797564_1.

Chandra